(a) Income Tax Ordinance (XXXI of 1970)---

----S. 12(9A)---Income deemed to accrue or .arise in Pakistan---If the Department could add capital expenditure claim in Profit and Loss Account for determining the net income conversely it could not be allowed to add the previous years profit for determining. the profit of the assessee for the year.

(b) Income-tax-----

----Income---Profit---Meanings---Income has different connotation but all profits are covered within the definition of income---Income has a wider connotation and profit is a part of it, however, a comprehensive and direct definition for the profit is not available.

(c) Income Tax Ordinance (XXXI of 1979)-----

----S. 12(9A) & First Sched, Part IV, Cis. (59) . & (136)---Income deemed to accrue or arise in Pakistan---Application for reference to High Court--Addition was deleted by the Appellate Tribunal. by modifying amount of "after, tax profit" i,e. after deducting previous year profits from such profit, while the assessee himself declared its "after tax profit" in its printed accounts by including previous year profit-- Validity ---Assessee had not added the previous year profit in its profit for the purposes of S.12(9A) of the Income Tax Ordinance, 1979 which was for determination of the funds available with the Company/assessee to know the liquidatory position---Same had got nothing to do with the requirement of S.12(9A) read with Cl: (59) of Part IV of the First Schedule of the Income Tax Ordinance, 1979---Reference application . was dismissed by the Appellate Tribunal.

Biria Brothers (Pvt.) Ltd v. CIT (1966) 13 Tax 76 and Shiri, Vastava and Sons (P.) Ltd. v. CIT (1963) 47 ITR 49 rel.

(d) Income Tax Ordinance (XXXI of 1979)---

----S. 12(9A)---Interpretation---Provision of S.12(9A) of the Income Tax Ordinance, 1979 is a deemed provision of law which had to be applied strictly---Benefit of doubt, by all means goes to the assessee---Section 12(9A), Income Tax Ordinance, 1979 treats an amount to be taxable income which otherwise under normal charging provision may not be an income of the assessee.

(e) Interpretation of statutes-----

---- Liberal interpretation is the essence of justice.

Muhammad Asif, D.R. for Appellant.

Muhammad Sarwar Khawaja for Respondent.

Date of hearing: 7th January, 2003.

ORDER

KHAWAJA FAROOQ SAEED (JUDICIAL MEMBER).-- Reference Application on behalf of the department has been filed. The refrained question speaks-as follows:--

"Whether in the facts and circumstances of the case the ITAT was, justified, to delete addition under section 12(9A) by modifying amount of "after tax profit" when the assessee company has itself declared its "After tax profit" at Rs.26,799,322 in its printed accounts?"

The learned DR while supporting above question repeated the facts again: However, his main emphasis was on the argument that the assessee himself having added in his accounts excess of tax earlier shown as provision was subsequently estopped from arguing that his profit should be determined as per normal dictionary meanings. In his opinion the assesses having declared in its balance sheet the amount of profit at Rs.21,736,599 and having subsequently added the balance of the provision of the last year, the amount for distribution was total of the same, which is Rs.26,799,332. The tax, therefore, was rightly charged by the IAC and its subsequently cancellation by the Tribunal is un justified. He also argued that the Legislature intendedly used the word `profit' in section 12(9A) against 'income' which determines the distinction. This way in his opinion the Legislature has considered the amount shown by the assessee himself m books to be his profit: Since the audited statement of accounts disclosed profit for the year at Rs.2,6,799,332 the assessee was bound to distribute 40% of the same as per his own accounts. In his opinion the question of law proposed as above arise from the following observations of the ITAT.

(i)The Income Tax Ordinance has not defined the expression "after tax profits of the relevant income year", hence the word profit has to be understood in its ordinary sense. The general definition is that it is the difference between the receipts and the expenditure and "After tax profits" means the profit thus computed minus the provision for taxes.

(ii)The profit should be taken, as the profit declared in the accounts. However, the assessee shall be further entitled to all standard account and audit principles and admissible expenses as per Income Tax Ordinance, e.g., claim of depreciation.

(iii)That assessee's profit to be taken for the purpose of clause (59) Part-IV of Second Schedule, if the book profit of Rs.21,736,599 after deduction of tax provision of Rs.5,768,196. The after tax profit thus comes to Rs.15,967,903. The assessee's contention that it distributed more than 40% of the after tax profit is correct.

(iv)The observation of IAC regarding inclusion of prior years excess tax, provision in accordance with IAS 12 is not accepted as the excess tax, of the earlier year cannot become profit of the year.

The learned AR first of all objected to the very constitution of the question. He said that in its present format it does not arise out of the order of the ITAT. On merits he remarked that the Tribunal has defined the word `profit' and in this regard all relevant factors have, been taken into account. He also argued that section 12(9A) when talks of profit it has in its background the purpose of protecting the shareholders. Collection of the Revenue is not the purpose behind its promulgation. This in his opinion is for a noble cause but through an improper legislation. In any case, he remarked that the use of word "after tax profit of the relevant financial year" cannot mean to include profit of the earlier year. The tax, he said is not an item of P&L. It has never been allowed as a deduction hence it cannot be. charged as a part of profit either. He also took pains to explain the word "after tax profit by saying that it can apply in three possible situations:--

(i)The tax which has been deducted at source and is covered under the presumptive tax regime as a final settlement/discharge of liability.

(ii)Tax payable on turnover ` which also being on declared figure is full and final settlement in particular circumstances.

(iii)The tax calculated as a provision on the .basis of actual calculation of the profits.

In any case he remarked that the profit cannot include, carry forward of an earlier year profit/income. He produced before us three different scenarios, for working of the after tax profit which are as follows:--

(1)In the first scenario, he has calculated the profit after tax without adjustment of the admissible expenses which the Tribunal has considered as statutory deduction for determining profit.

(2)In the second scenario profit has been calculated after deduction of admissible statutory expenses.

(3)In the third scenario the calculation has been made on the basis of income assessed by the Department.

In all three situations, the income distributed by the company stands at a figure, which is more than the requirement of section 12(9A) 4^th proviso.

We have heard both and perused the order also. We are convinced that the word `profit' as used in section 12(9A) cannot be allowed to be interpreted as learned DR has proposed'. In this regard the finding of the Hon'ble High Court on the subject which says that this deemed provision should be interpreted keeping in view the purpose behind and the benefit of doubt should be given to the taxpayer also is a guide for us and for all concerned. Moreover, as informed by learned AR this provision earlier existed in repealed Income Tax Ordinance, in section 23, as the then it was, the word used was `net income' which obviously means an income after allowance of expenses under law. The case-law with reference to the above section of the repealed Act may not be applicable-on all fours but, however, the inference which one can draw from the same is that the capital expenditure neither can be reduced nor can be added while determining the profit. In this regard the case of Biria Brothers (Pvt.) Ltd v. CIT (1966) 13 Tax 76 (J.P.) Shiri Vastava and Sons (P.) Ltd. v. CIT (1963) 47 ITR 49 can be relied upon. The finding in the above judgments is that the Income Tax Officer himself can look into the business profits adjudged in the light of the commercial principles. In other words, the `actual profits for commercial point of view" i.e. to gay" the accountable profits of the company actually at its disposal. A company cannot deduct capital expenditure from its profits by showing them in the P&.L account and the Department would be justified in adding to such claims shown in the P&L account. The capital expenditure of the company during the relevant accounting years for the purposes of determining its business profit or actual profit out of which dividend had to be declared if can be added by the assessing Officer for determining net income for the purpose of said clause why cannot be validly incurred expenses be reduced? Similarly as already mentioned by us in the above paras if the Department can add capital expenditure claim in P&L account for determining net income conversely if cannot be allowed to add the previous years profit for determining the profit of the assessee for the year. Profit has to be the difference between the receipts and expenditure. Income undoubtedly is a different, connotation but all profits are covered within the definition of income. As already mentioned income is a wider connotation and profit; is a part of it however a comprehensive and direct definition for the same is not available. The Department contention that the provision of the previous year was more and the tax determined was less; hence the difference can be added in the income, is unfounded. Assessee has not added the same in its profit for the purposes of section 12(9A). This is for determination of the funds available with the Company "to know the liquidatory position. It has got nothing to do with the requirement of section 12(9A) read with clause (59) of Part IV of the First Schedule.

Further the three possible scenarios to determine the profit given by the learned A.R. are also relevant. However, since we have already given a clear and unequivocal finding and 14 our view the profit mentioned in the audited statements of accounts is obviously subject to other legal allowable expenses, we have no hesitation in saying. that the scenario 14.2 fits in more in the scheme of section under discussion. Needless to repeat that the provision under discussion is a deemed provision of law which has to be applied strictly. The benefit of doubt by all means goes to favour the assessee. Moreover, this section treats an amount to. be taxable income which otherwise under normal charging provision may not be an income of the assessee. A liberal interpretation therein, therefore, is the essence of justice. This, however, being an additional argument and the facts of the case being ,supportive to our decision given earlier, we feel that the question framed is without substance.

There is no room before us to consider the same as referable to the Hon'ble High Court.

The Reference Application is dismissed.

C.M.A./703/Tax(Trib.)Application dismissed